Value Creation Measures a “Step in the Right Direction”

Your recent article “Four Options for Measuring Value Creation” (Aug. 09, page 34) touched on my long-held belief that accounting measures, while necessary and useful, are limited when it comes to valuing an investment in the company’s stock. Your proposed measures of value are an important step in the right direction.

Since I retired some 20 years ago, I have managed my own investments, which contribute importantly to my income. During that period, my portfolio has failed to yield positive annual returns only once, and my equity investments consistently outperform most mutual funds.

Simply, I rely on my business experience. I use stock finders to identify prospective investments, select prospects from the list in industries with which I am familiar, and read several market analysts’ detailed reports. I may look briefly at financial data, but my primary interest is their reviews of the industry outlook and management plans to judge whether the company:

• Has a history of adapting successfully to changing conditions.
• Has realistic plans for acquisitions, development of new products, expansion into new markets or streamlining their organization.
• Has potential leaders to replace key top executives who are close to retirement.

Once I acquire a stock, I carefully read:

• Management letters to stockholders.
• Notes to financial statements.
• Sales catalogs, if they have a consumer mail-order operation.
• Current company news reports, articles, etc.

If I find they have not consistently met my reasonable expectations for success, I may sell the stock, even though it is still well-regarded by the market. I know I may lose some future gains, but I will make them up by investing the proceeds in a more promising alternative.

Robert A. Wofsey, CPA

Mamaroneck, N.Y.